The government’s “B20” stress test has blocked countless people from buying rental properties as investments. The current 4.79% minimum qualifying rate means would-be buyers have to prove they can afford mortgage payments far above what they’d really pay.
Fortunately for some borrowers, there are alternative lenders (e.g., credit unions) that don’t impose the federal stress test. They qualify borrowers on the actual 5-year fixed payment they’d have to make each month, just like the “old” days (pre-2018).
Mind you, you’ll pay a sizeable rate premium for this flexibility. We’re seeing credit unions quote anywhere from 2.84% to 3.49% for non-B20 compliant rental mortgages, for otherwise prime borrowers. That’s a point or more above regular bank rates.
But consider that by qualifying at 2.84%, some borrowers are getting over 15% more buying power. Or, to put it another way, a typical borrower might need $8,000 to over $10,000 less income to get approved.
Non-B20-compliant rental financing isn’t for most. It’s a niche product for customers who:
Have fallback resources (i.e., funds they could tap in an emergency), and
Still want to buy a rental.
Finding such credit unions isn’t easy — mainly because they don’t like to advertise this workaround to federal guidelines. And some get upset when we mention them here by name since they prefer to fly under the radar. The best place to start is with an experienced mortgage broker. If they specialize in rental financing, they’ll know which lenders offer non-B20 compliant lending.
This & That
10-year Canada Mortgage Bond issuance almost doubled last year, writes First National. That extra supply of 10-year money helped 10-year fixed mortgage rates reach new lows in 2020.
Despite double-digit home price gains and inventories at unheard-of lows, BoC Governor Tiff Macklem assures that: “So far, we are not seeing the kind of excessiveness in the housing market that would really get us worried. This doesn’t look like 2017.” Uh-huh.
“…A taper [of BoC bond buying] could start as early as next quarter,” wrote RBC Capital Markets in a report this week. That, of course, would take some downward pressure off fixed mortgage rates, other things equal.
If the +/- $1.9 trillion U.S. stimulus package becomes law within 90 days, as expected, “it would mean the recent stimulus packages match the stimulus last spring, despite the dramatic improvement in the economy,” reminds Bank of America. “…This creates major upside risks” to inflation forecasts, the bank says.
Quotable
“Reacting to BoC forecasts is a fool’s game. They may have over three hundred highly educated economists on staff, crunching numbers, and creating models, but their predictions are rarely on the mark.”—Michael O’Neill, Agility Forex (Source)
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They should eliminate the stress test for people who get 10 year mortgages. There is zero chance that rates would go up so much in 10 years that people couldn’t afford their mortgage. This ridiculous stress test is nothing more than nanny state regulators at work with no common sense.
Last month, I was quoted 1.59% on a 4yr fixed by a Scotiabank branch in NS for a refi on a rental property mortgage. An interest rate of 2.84% would mean 79% higher interest costs, and interest is often a landlord’s largest expense.
Since CMHC stopped insuring single-unit rentals, there seems to be little consistency in how banks calculate debt service ratios when more than one rental is involved. For the first rental purchase, it seems the most common approach is to take 50% of gross rent, and add that to the borrower’s income.
For 2-4 unit rentals, which are still eligible for insurance, the CMHC has a pretty good page explaining the permitted debt service formulas. https://www.cmhc-schl.gc.ca/en/finance-and-investing/mortgage-loan-insurance/mortgage-loan-insurance-homeownership-programs/rental-income
To Ralph I would say, do the math. What does 125 bps more tax deductible interest cost versus lost price appreciation on a $300,000 rental property?
Extra interest over five years at 2.84%, with deduction at 39% tax bracket: $10,692
Five year price appreciation at 3% p.a.: $47,782
If I were not a bankable investor I’d be more worried about qualifying for a mortgage than paying a point more interest. At today’s rates, the sooner you can have tenants building equity for you the better.
Cashflo,
I never count on capital gains to justify a rental investment, nor would I advise any new investor to do that either. As most Toronto condo owners know, prices don’t always go up.
No offence but someone who buys an investment property without expectation of capital gain is a probably a moron. I would advise this person to stay as far away from real estate as possible.
The reason I enjoy this site is because of its politeness. Kingcity’s comment should be removed. Everyone expects capital gain, but if you are buying rental properties for income stream a capital gain down the line is not a focus.
“we are not seeing the kind of excessiveness in the housing market that would really get us worried”
Say what?? What kind of excessiveness does Macklem need to see to get worried? A 17% national price spike in 12 months DURING A RECESSION isn’t enough?
I don’t know where Scott and Ralph are buying their real estate but in BC Cap rates are down to 2-3%. Buying a rental for its projected cash flow without carefully assessing appreciation potential is like buying a stock portfolio just for the dividends. It makes no sense.
So many things can happen to turn your cash flow negative. Anyone hear of the pandemic and rent deferrals? Many landlords accrued no rental income for months in 2020 while their property values escalated by tens of thousands of dollars.
I don’t know any serious investors who don’t focus on total return. If you have a choice between two $300,000 properties, one that yields $600 a month in a so-so location and one that yields $500 a month in a outstanding location, which are you going to pick? Cash flow is always just one of the key considerations.
I like what you have written in this article, especially the fact about flying under the radar. I always thought that the Government was reading such sites and screwing people up. I mean lets not be foolish, if it was advertised left and right about some things the government would have to notice it. Kind of like going 109KM in 100KM zone. Its most Likely OK to do so with right weather and no traffic or next drivers not distracted or sleeping behind the wheel, but in a rush hour it can get tricky and sticky with a cop at the next lane. The truth is that all of those policies are a blanket policies as to have a buffer built in and allow for some core stability, BUT, Not all Joes and Janes are the same in terms of their lifestyles and habits.
You often see couples with 6 figure salaries EACH and struggling due to lifestyle creep up…..and, less salaried living in “abundance” in the same neighborhood!
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They should eliminate the stress test for people who get 10 year mortgages. There is zero chance that rates would go up so much in 10 years that people couldn’t afford their mortgage. This ridiculous stress test is nothing more than nanny state regulators at work with no common sense.
Last month, I was quoted 1.59% on a 4yr fixed by a Scotiabank branch in NS for a refi on a rental property mortgage. An interest rate of 2.84% would mean 79% higher interest costs, and interest is often a landlord’s largest expense.
Since CMHC stopped insuring single-unit rentals, there seems to be little consistency in how banks calculate debt service ratios when more than one rental is involved. For the first rental purchase, it seems the most common approach is to take 50% of gross rent, and add that to the borrower’s income.
For 2-4 unit rentals, which are still eligible for insurance, the CMHC has a pretty good page explaining the permitted debt service formulas.
https://www.cmhc-schl.gc.ca/en/finance-and-investing/mortgage-loan-insurance/mortgage-loan-insurance-homeownership-programs/rental-income
To Ralph I would say, do the math. What does 125 bps more tax deductible interest cost versus lost price appreciation on a $300,000 rental property?
Extra interest over five years at 2.84%, with deduction at 39% tax bracket: $10,692
Five year price appreciation at 3% p.a.: $47,782
If I were not a bankable investor I’d be more worried about qualifying for a mortgage than paying a point more interest. At today’s rates, the sooner you can have tenants building equity for you the better.
Cashflo,
I never count on capital gains to justify a rental investment, nor would I advise any new investor to do that either. As most Toronto condo owners know, prices don’t always go up.
No offence but someone who buys an investment property without expectation of capital gain is a probably a moron. I would advise this person to stay as far away from real estate as possible.
The reason I enjoy this site is because of its politeness. Kingcity’s comment should be removed. Everyone expects capital gain, but if you are buying rental properties for income stream a capital gain down the line is not a focus.
“we are not seeing the kind of excessiveness in the housing market that would really get us worried”
Say what?? What kind of excessiveness does Macklem need to see to get worried? A 17% national price spike in 12 months DURING A RECESSION isn’t enough?
I don’t know where Scott and Ralph are buying their real estate but in BC Cap rates are down to 2-3%. Buying a rental for its projected cash flow without carefully assessing appreciation potential is like buying a stock portfolio just for the dividends. It makes no sense.
So many things can happen to turn your cash flow negative. Anyone hear of the pandemic and rent deferrals? Many landlords accrued no rental income for months in 2020 while their property values escalated by tens of thousands of dollars.
I don’t know any serious investors who don’t focus on total return. If you have a choice between two $300,000 properties, one that yields $600 a month in a so-so location and one that yields $500 a month in a outstanding location, which are you going to pick? Cash flow is always just one of the key considerations.
I like what you have written in this article, especially the fact about flying under the radar. I always thought that the Government was reading such sites and screwing people up. I mean lets not be foolish, if it was advertised left and right about some things the government would have to notice it. Kind of like going 109KM in 100KM zone. Its most Likely OK to do so with right weather and no traffic or next drivers not distracted or sleeping behind the wheel, but in a rush hour it can get tricky and sticky with a cop at the next lane. The truth is that all of those policies are a blanket policies as to have a buffer built in and allow for some core stability, BUT, Not all Joes and Janes are the same in terms of their lifestyles and habits.
You often see couples with 6 figure salaries EACH and struggling due to lifestyle creep up…..and, less salaried living in “abundance” in the same neighborhood!